What happens if you contribute to an IRA without earned income?
The IRS gets a little grumpy if you contribute to a Roth IRA without what it calls earned income. That usually means that you need a paying job—working for either someone else or your own business—to make Roth IRA contributions.
You can open and contribute to a Roth IRA regardless of your employment status (full-time, part-time, or not working) so long as your contributions are equal to or below your earned income.
To contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 in 2023. In 2024, the threshold rises to $161,000. If married and filing jointly, your joint MAGI must be under $228,000 in 2023.
In 2023, the limit for both deductible and non-deductible IRA contributions is $6,500 ($7,500 for those age 50 or older). It's important to note that to contribute to an IRA you must have earned income, and your IRA contributions can't exceed your earned income for the year.
Saving for retirement without a regular paycheck is possible. You have several options to choose from that offer tax advantages. For those who are eligible, solo 401(k)s, spousal IRAs, and HSAs can help build a retirement nest egg.
Interest taxed as ordinary income
Typically, most interest is taxed at the same federal tax rate as your earned income, including: Interest on deposit accounts, such as checking and savings accounts.
You may be in a position to contribute to an IRA later in life. Being on Social Security won't bar you from making contributions, but you also can't fund an IRA with those benefits.
While you typically need to have income to open an individual retirement account, there is an exception for married spouses who file their taxes jointly. It's known as a spousal IRA, but it is simply a traditional or Roth IRA in the non-working spouse's name into which both partners can make contributions.
Unearned Income is all income that is not earned such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, dividends, and cash from friends and relatives. In-Kind Income is food, shelter, or both that you get for free or for less than its fair market value.
A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For tax year 2023, the annual IRA contribution limit for both Roth and traditional IRAs is $6,500. This limit rises to $7,000 in 2024.
What is a backdoor IRA?
A “backdoor” Roth IRA allows high earners to sidestep the Roth IRA's income limits by converting nondeductible traditional IRA contributions to a Roth IRA. That typically requires you to pay income taxes on funds being rolled into the Roth account that have not previously been taxed.
The money deposited into a traditional IRA reduces your adjusted gross income (AGI) for that tax year on a dollar-for-dollar basis, assuming it is within the annual contribution limits (see below). So a qualifying contribution of, say, $2,000 could reduce your AGI by $2,000, giving you a tax break for that year.
Income: To contribute to a Roth IRA, you must have compensation (i.e. wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than: $160,000 - Married filing jointly.
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.
IRA contributions will be reported on Form 5498: IRA contribution information is reported for each person for whom any IRA was maintained, including SEP or SIMPLE IRAs. An IRA includes all investments under one IRA plan.
A nonworking spouse can open a traditional IRA or a Roth, but only if they qualify. See this page for income and other limits for both types of IRAs. Note: A spousal IRA is simply an ordinary IRA in the spouse's name.
Simply put, a spousal IRA enables a stay-at-home husband or wife to set up a retirement account in their own name. As long as one person in your household brings home a paycheck and you file a joint tax return, you're good to go! When setting up a spousal IRA, you have a choice between a traditional and a Roth IRA.
If, and only if, you have your short-term cash needs covered, you can think about investing in attractive long-term investments such as stocks or at least continuing to hold those you already own. But you must take a long-term mentality with stocks because of their high volatility.
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
Earned Income. Earned income includes all of the following types of income: Wages, salaries, tips, and other taxable employee pay. Employee pay is earned income only if it is taxable.
Is SSDI considered earned income?
Other disability benefits don't count as earned income when you claim the EITC. These include: Social Security Disability Insurance.
Income Limits for Roth IRAs
If you don't earn anything in a tax year, you will be ineligible to contribute to your Roth IRA for that year. You can still hold the account, but you won't be able to add to it.
The IRS would receive notification of the IRA excess contributions through its receipt of the Form 5498 from the bank or financial institution where the IRA or IRAs were established.
To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.
Social Security can potentially be subject to tax regardless of your age. While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
